Almost everyone requires a loan at some or the other point in their life. Whether it is to buy a house or vehicle, start a small business, or for education, loans make it easier to get things when cash is short.
However, if you seeking a business loan, then the process won't be that easy as there is an element of risk involved. So, it is very important that before you apply for a loan you understand how the bank will evaluate your loan application. There are various factors through which the bank will analyse the borrower. Given below are some of the factors that the bank will review and, if you satisfy the criteria, will increase your chances of bagging a loan.
Before You Apply For A Loan...
The first factor that all the banks will look into is the ability of the borrower to repay the loan. So, banks will take into account the sources of repayment. If you are taking a loan for a business then the bank will take into account the cash flow that the enterprise can generate. The banks will also take into account another source such as collateral.
The bank will also go through the borrowers past financial record. If the business has been profitable and it can cover the debt then the bank will approve the loan. In case the business has not enjoyed success in the past as the borrower needs the funds to grow, then the bank will ask for a detailed explanation on how the loan can be repaid.
Good business credit is essential as no bank will bet their resources on defaulters. Sometimes, banks will also analyse the personal credit of the borrower. That is why before applying for a loan make sure that your credit record is good.
Your credit report will carry your credit ratings which you will have to submit to the bank. The bank will evaluate and depending on it you will receive the loan. However, different banks evaluate the credit report differently. If one bank rejects your loan application you may find another bank that would evaluate the report differently.
Your credit ratings will be a combination of a number and letter. The most important is the number; the letter denotes the type of credit. If you are rated '1' then you have the perfect score. This means that you have paid all your bills in time. If you are rated '2' or '3' then it means that you have paid your bills two to three months late. A '9' rating will mean you have defaulted on the bills and it will become very difficult to obtain a loan. It is always better if you take the help of an accountant to interpret your credit report.
The bank will also check if you have a second source of repayment. This is known as collateral, which are basically all those assets that can be sold to pay back the loan. It is the collateral which secures the loan and most loan programs require some sort of collateral. If the borrower doesn't have any collateral then he/she can use a co-signer who can pledge the collateral or the loan may not be granted.